From From Freakonomics Freakonomics

to Financial Crisis:to Financial Crisis:What can Chicago Economists tell us, and what they can’t.

Ming-Jen Lin, Professor, Department of Economics, National Taiwan University

Ph.D. 02’, U of Chicago

Let’s Do Some Quiz First!Let’s Do Some Quiz First!以下何者最有助於改善印度農村婦女的生活？(1)印度政府禁止夫家索取嫁妝和視性別選擇墮胎 (2)有線電視和衛星電視的普及 (3)

付錢鼓勵婦女不要墮掉女胎 (4)專門針對印度市場設計製造的保險套

下列哪一個不是 WEGO motel 折價卷上印的折價時段 ?

(1)下午1 點到5 點 (2)晚上5 點到7 點 (3)早上7 點到 12點 (4)星期日

下列何者對阻止溫室效應最具成效？(1)看不願面對的真相 (2)碳排放量的總限量與交易制度 (3)火山爆發 (4)植樹

大學低學費可以讓窮人家的小孩有翻身的機會，促進階級流動與社會公平正義

怪咖如何把經濟學界搞的天翻地覆？怪咖如何把經濟學界搞的天翻地覆？

The legend of Steve LevittThe legend of Steve LevittTraditional Economics is about

consumption, interest rate, or GDP,

Image of traditional economist: boring, speak Mars Language (aka math).

Example:http://blogs.wsj.com/digits/2009/

05/20/t-mobile-brings-catherine-zeta-jones-back/tab/article/

In fact, freakonomics has In fact, freakonomics has started already started already Beauty matters? Why?Beauty is Symmetry, (Whoops, it is skin

deep)But it is deeper: Beautiful people are

healthier (so it is not skin deep).So cosmetic surgery is actually messing

up with nature’s selection process.How big is the effect?In wage (Hammermash), election( 駱明

慶 ),or even teaching evaluation!

Then here comes Steve ! And all is Then here comes Steve ! And all is Bright! Bright! (( 芝大經濟系教授芝大經濟系教授 , (#2 seller at Amazon) , (#2 seller at Amazon) 2004 Clark Medal) 2004 Clark Medal)

In Freakonomics, we sawIn Freakonomics, we sawAbortion reduces CrimeTeachers, Sumo Wrestlers, and

Real Estate Agents are all Cheaters.Drug dealers still live with their

mom.

Gang leader for a day: Gang leader for a day: VenkedeshVenkedesh

Can Economics Can Economics explain explain everything?everything?

Yes we Yes we (almost) (almost) can!can!Our ultimate weapon: incentive-- something that induces a person to act, i.e. the prospect of a reward or punishment. Rational people respond to incentives because they make decisions by comparing costs and benefits

Ex: higher gas prices, higher sales of “hybrid” cars. Higher cigarette taxes, teen smoking falls.

為什麼一顆腎要等為什麼一顆腎要等 3030 年年 ??沒有誘因善心捐贈 P=0 Excess demandIran流浪教師也一樣

In the past 45 years, we have In the past 45 years, we have successfully expanded the successfully expanded the scope of economics,scope of economics,e.q. to: invaded other e.q. to: invaded other disciplinedisciplineviva Economic imperialism !viva Economic imperialism ! Commander- in- chief Commander in Navy Seal!

What’s in What’s in SuperFreakonomics?SuperFreakonomics?

exex Being a Woman ain’t Being a Woman ain’t easyeasyWhen there are global warming(I

am talking about 16 centry)-blame the old, women or widow!(Witch)

Missing women: More than 100 million women are missing!

Why: Discrimination

(female infanside, lack of Medicine and education…)

Discrimination against Discrimination against women women is our major suspectis our major suspect

Courtercy of Josh Angrist

Ex: India: ”May you be the mother of hundred sons”, ”500 Rubis now, save 50,000 Rubis later”

Even for Harvard graduates:有工作的女生比男生薪水少 30%

(Katz & Gordan, p58, but I think this is wrong!)

What is the best way to improve women’s status?

教育 ?政令宣導 ?叫男人要愛老婆 ?

At least in India….

Watch Plywood soap opera!Watch Plywood soap opera!

Oster and Jenson(2010) Oster and Jenson(2010) QJEQJEIntroduction of cable television is

associated with signicant decreases in

(1)the reported acceptability of domestic violence towards women (2) son preference, (3) increases in women's autonomy and decreases in fertility.

(C)(C) Prostitutes Prostitutes P & Q are determined by Demand

and Supply !建築師 (or 大學教授 ) 與 sex worker 的

薪水比較 ? Supply and demandSuperfreakonomics provides three

ways to look at the this topic: historical data, current days survey, and 深度訪談。

當性工作者的成本 : 羞恥心，風險較高， 無法轉行當太太。

Historical data: Chicago in Historical data: Chicago in 19101910Report from the vice commission:

Everleigh sisters 退休時， 存了約現金幣值 2200 萬美金 !

女性類別 週薪（當時價格）

年薪（現在價格）

女店員 6 美元 6500 美元

低價妓女（可能是阻街）

25 美元 25000 美元

妓院賣身的妓女 70 美元 76000 美元

Everleigh Club 400 美元 430000 美元

Everleigh Club:Everleigh Club: 當年高級招待當年高級招待所所顧客包含：商業鉅子，政治人物，運

動員，藝人，以及反賣淫人士 !老闆 Everleigh 姊妹對員工 提供健康

飲食，醫療照護，才藝教育。 小姐們迷人，注重衛生，值得信賴，

也能與客人騷文弄詩，引經據典。入場費 250 美元，香檳一瓶 370 美元，

服務 1250 美元。

Case Study: AllyCase Study: Ally in in ChicagoChicago一開始 $300/hr ，每周工作 30 小時後

來每周工作 15 小時，價格一路調高到$500 美元 --- 反而更搶手 ! 年收入超過20 萬。

Price –insensitive而且工作內容也有很大的改變 : 每天有好

幾個”一小時” 約會，和只有兩個三小時的約會，內容完全不同。

這跟咖啡在星巴克賣和在 SEVEN 賣家差很大一樣 bundling…

為什麼百年前的妓女賺得多為什麼百年前的妓女賺得多 ??女性類別 週薪（當時

價格）週薪（現在價格）

年薪（現在價格）

百年前女店員 6 美元 138 美元 6500 美元百年前低價妓女 25 美元 575 美元 25000 美元百年前妓院賣身的妓女 70 美元 1610 美元 76000 美元百年前 Everleigh Club 400 美元 9200 美元 430000 美元現代女店員 300 美元 15000 美元

現代芝加哥低階妓女 350 美元 18000 美元

現代愛莉 200000 美元

Basically, we study how intensive changes people’s behavior

This can be applied to macroeconomics, too!

Let’s take the financial crisis as an example

The Financial Crisis 2008-The Financial Crisis 2008-20092009

Trigger by the Great American Housing Bubble: in summer 2006, the housing price were twice as high as they had been in Jan 2000.

Why the bubble?Why the bubble?(1)stock market crash 2001:

Greenspan lower the interest rate to 0%- the loose monetary policy pop up asset (housing) price

Greenspan’s testimony: late 2004 “a severe distortion in housing price is mostly unlikely”, Sep 2008 he admitted he failed to anticipate the looming housing and mortgage lending crisis.

Why the bubble?Why the bubble?• (2)The One to Blame? Loan-Backed

Securities( 有貸款作為抵押的證劵 )• Assets created by pooling individual

loans and selling shares in the pool (a process called securitization, 資產證劵化 )

• Ex mortgages, student or credit card loans….

• Mortgages-back securities: thousands of individual home mortgages are pooled and shares sold, trades like bonds in the financial market.

Why the bubble?Why the bubble?• A lot of default: supply of houses increase,

creating a downward spiral on housing prices—a lot of homeowners are now “underwater”(they owe more than their house is worth), b/c they buy with only minimal down payment—banks start foreclosure( 回贖權的取消 , 擔保品房子不能取回 ), more default!

• A lot of banks and investment companies hold a lot of housing securitization related assets!

• Banks loses money!• The epidemics begin! No borrowing and

lending, even between banks!

Let’s blame the Wall Let’s blame the Wall street!street!

But actually, according to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927.  The 99.9th percentile income fell from $2,155,365  to $1,432,890.  During the same period, median income fell from $32,879 to $32,396.

Raghuram RajanRaghuram Rajan

Fault Lines: How Hidden Fractures Still Threaten the World Economy

http://press.princeton.edu/titles/9111.htmlhttp://www.guardian.co.uk/commentisfree/

cifamerica/2011/jan/07/economics-economywhat comes around goes around, but when

the "goes around" comes, the person who created“ comes around" has gone!

A seminar in summer 2008

Government’s reaction: Government’s reaction: Keynes’s story: A Contraction Keynes’s story: A Contraction in ADin AD

Quantity ofOutput

PriceLevel

0

Short-run aggregatesupply, AS

Aggregatedemand, AD

AP

Y

AD2

1. A decrease inaggregate demand . . .

Causes output to fall in the short run

2

BP2

Y2

A Monetary Injection A Monetary Injection increases ADincreases AD(so does expanding fiscal (so does expanding fiscal policy)policy)

MS2Moneysupply, MS

Aggregatedemand, AD

YY

P

Money demand at price level P

AD2

Quantityof Money

0

InterestRate

r

r2

(a) The Money Market (b) The Aggregate-Demand Curve

Quantityof Output

0

PriceLevel

3. . . . which increases the quantity of goods and services demanded at a given price level.

2. . . . theequilibriuminterest ratefalls . . .

1. When the Fedincreases themoney supply . . .

Government Reaction: Government Reaction: improving liquidity and improving liquidity and stimulus plan stimulus plan

• (1)Oct 2008: 700 billion, put into the banking system

• (2) Fed’s conventional practice: lower fund rate form 5.25% in Sep 2007 to 0 in Dec 2008

• (3) Fed’s unconventional practice: lent huge sum of money to a wide variety of financial institutions, purchasing private assets, including commercial papers(short term company debt)

• It is necessary in such a drastic time (Mankiw: creativity of Bernanke), or the Fed is taking too much risk?

• (4) Obama: expand AD• (5) 台灣 : 消費卷

The (Un)intended The (Un)intended ConsequenceConsequenceGovernment spending goes sky

high: inflation? Or government bankrupt?

Next bubble: bond market?信評調降 ?

Quantitative easing(Quantitative easing( 量化量化寬鬆寬鬆 ))Starting in November 2010. The Fed

purchased $600 billion of long-term government bonds, giving banks $600 billion more reserves in return.

By pumping all the money into the system, It is supposed to lower the interest rate(and bond yield rate), and stimulate the economy by pumping up investment and purchase(increase AD), with the cost of inflation.

A classical textbook inflation-unemployment(output) trade off.

If you still don’t understand: watch this

Ben the Man!Ben the Man!He can drop money in to the He can drop money in to the market!market!

But he is still clueless !But he is still clueless !(unemployment 9.2%, growth (unemployment 9.2%, growth rate 2.5%?)rate 2.5%?)

John Cochrane, Professor, John Cochrane, Professor, University of ChicagoUniversity of Chicago

Is QE2 a Savior, Inflator, or a Is QE2 a Savior, Inflator, or a Dud(Dud( 啞彈啞彈 )?)?

FED 買債劵 : red-dot line goes up.Ben said:” Yields on 5- to 10-year nominal

Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases”

Notice: bond price and yield rate are negatively correlated.

So “If yields go down, the Fed is successfully stimulating the economy with QE2. And if yields go up? Well, the Fed is successfully stimulating the economy with QE2?” “ 此即鄉民所謂大絕 !”

The point is: with zero interest rate, money is exactly the same as short term government debt!

Banks do not care which one to hold!綠色 MM 和紅色 MM But helpless does not means

harmless.If investors lose faith, and sell all the

govt bond when maturity…..stagflation will break out!

Is QE2 working?Is QE2 working?The fact that QE2 is need proves QE1

is not working, QE3 is needed proves that QE2 is not working,….QED XD

John H. Cochrane :“Mostly, it is dangerous for the Fed to

claim immense power, and for us to trust that power, when it is basically helpless. If Bernanke had admitted to Congress, “there’s nothing the Fed can do. You’d better clean this mess up fast,” he might have had a much more salutary effect.”

How about Greek and PIGS How about Greek and PIGS National Debt?National Debt?

Ken Roggof, March 2011Ken Roggof, March 2011

Chain Reaction?Chain Reaction?Would be a disasterLuckily Greek has passed the IMF programRemember S Korea in 1997The terms are tough, but Greek’s public

sector is , 希鐵 vs 台鐵營運收入 vs 人事費But privatization plan might be too quick嬰兒潮老化 社會福利與公部門的慷慨支出 讓國家

無法負荷老人搶劫年輕人 ?台灣呢 ?

From financial crisis to debt crisisExpanding monetary and fiscal

policyIncrease debt!How are the governments going

to pay?(1)raise tax, reduce spending(2) inflation(3) default

What could the world (US) What could the world (US) do?do?Not to spend like a drunken

sailor…Actually, drunken sailor would

protest!They stop spending when they

ran out of money!

LucasLucasRight to focus on

policies to alleviate recession, aid recovery

But other considerations important too:

— long term growth in productive capacity

— efficient use of resources

A weak and deviated(from A weak and deviated(from historical trend recovery)historical trend recovery)

• Liquidity is no longer the problem: — banks have huge excess (above requirements)

reserves Yet business investment remains very low Unemployment retains very high Is this because government is not spending enough? Believe it is more accurate to say that the problem is

government is doing too much Again, I see analogies to the U.S. of the 1930s Likelihood of much higher taxes, focused on the “rich” Medical legislation that promises large increase in role

of government Financial legislation that assigns vast, poorly-defined

responsibilities to Fed, others Are these conditions that foster a revival in business

investment, consumer spending?

Is it possible that by imitating European policies on labor markets,

welfare, and taxes U.S. has chosen a new, lower GDP trend?

• If so, it may be that the weak recovery we have had so far is all the

recovery we will getAnd that is NO GOOD for the rest of

the world!

What should we do?What should we do?Back to the fundamental.

Thomas Sargent 2011 Nobel Thomas Sargent 2011 Nobel Laureate Minneapolis Fed Laureate Minneapolis Fed interview in 2010 interview in 2010

Interviewer:How did Krugman think about modern macroeconomics presented in Princeton?

Sargent: He never attended the seminarWhen I was there.

“policymakers can’t manipulate the economy by systematically ‘tricking’ people with policy surprises. Central banks, for example, can’t permanently lower unemployment by easing monetary policy, because people will (rationally) anticipate higher future inflation and will (strategically) insist on higher wages for their labor and higher interest rates for their capital.”

Lucas CritiqueLucas CritiqueGiven that the structure of an

econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models

So the key problem now is So the key problem now is really..really..People are not surprised

anymore! Compared to 40 years ago!

Monetary policy? Inflation will follows!

Fiscal policy? I’d better save for the future tax days!

His graduation speech to His graduation speech to Berkeley studentsBerkeley students1.Many things that are desirable are not

feasible.2. Individuals and communities face trade-offs.3. Other people have more information about

their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8.Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.